Not only are Americans drowning in student loans they have no hope of repaying, but it's commonly understood that student debt can't be discharged in bankruptcy. 1 in 4 bankruptcies involves student debt, and that debt is almost never discharged.
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A generation's worth of tacit conspiracies between higher-learning institutions, lenders, and educational advisors has saddled millions of Americans with crushing, punitive debt, subjected to outrageous interest rates and penalties.
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These people took out loans when they were children in hopes of attaining a middle-class life through education. They got the education, but are mired in spiralling poverty thanks to the debt they took on to get it.
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Meanwhile, that debt has been spun into a form of toxic Wall Street asset, the "student loan asset-backed security" (SLAB), which securitizes the payment streams from immiserated people whose student debts will chase them into the grave.
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What if it's all a con, though? What if the law that prevents student debt from being discharged in bankruptcy had been systematically misinterpreted? What if all that debt could just be erased through bankruptcies that are not nearly so awful as the debts they'd clear?
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That'd be wild, huh?
Earlier this month, @atlblog ran a long, fascinating feature by @IanFrisch, telling the story of @aconnellsmith, a lawyer who happened upon a long-buried legal secret while working on an assignment for law-school in 2014.
abovethelaw.com/2020/10/how-th…
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Earlier this month, @atlblog ran a long, fascinating feature by @IanFrisch, telling the story of @aconnellsmith, a lawyer who happened upon a long-buried legal secret while working on an assignment for law-school in 2014.
abovethelaw.com/2020/10/how-th…
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Smith discovered that most student debt COULD be discharged in bankruptcy, that the "educational benefit" clause of the 1990 bankruptcy act CLEARLY didn't mean what the courts and the legal profession had taken it to mean. It was right there, in the Congressional Record.
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Government student loans couldn't be readily discharged, but the $150b in private student loans, a form of subprime debt dominated by an obscure institution called The National Collegiate Student Loan Trust (no employees, office, or website!) could be.
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After law school, Smith got a job at an NYC white-shoe firm and convinced the partners to let him test his theory: he sued Citibank on behalf of a student debtor...and won. It was his first time in court, he didn't even know where to stand, but the case was crystal clear.
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His bosses thought the win was cute, but they were in the business of representing banks, not suing them. Smith quit and started his own firm, and racked up 50 individual victories in four years, totalling millions.
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Starting in 2016, Smith forged alliances with other lawyers to begin mass-scale class action cases against banks holding student debt.
These cases cover 500k borrowers and $3b in debt, and have three demands:
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These cases cover 500k borrowers and $3b in debt, and have three demands:
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I. All outstanding debt is wiped away, you never call these people and ask for this money again
II. Give back all the money you have collected since the date of these people’s initial bankruptcies
III. Pay punitive damages for your illegal conduct
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II. Give back all the money you have collected since the date of these people’s initial bankruptcies
III. Pay punitive damages for your illegal conduct
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He's particularly interested in the NCSLT, that shadowy LLC with no employees or offices, that oversees $12b in debt that it neither originated, issued or serviced.
NCSLT is a front for Massachusetts's First Marblehead, a bank so tiny it lacks a federal charter.
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NCSLT is a front for Massachusetts's First Marblehead, a bank so tiny it lacks a federal charter.
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Without a charter, First Marblehead can't originate out-of-state loans, so it created a rent-a-charter arrangement with @PNCBank, @Chase and @WellsFargo, who originate 11% loans to the poorest, most desperate children hoping for university educations.
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First Marblehead buys the loans and pays finders' fees to the big banks. It also works directly with universities, who act as loan originators to desperate kids, knowing that First Marblehead will immediately buy those loans and pay the university a commission.
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First Marblehead acquired a nonprofit, The Education Resources Institute, and laundered loans through that division, making the "nonprofit loans" that, it believed, would be immune to discharge in bankruptcy. The company went public in 2003 and shares jumped 250% in a year.
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First Marblehead uses NCSLT to turn these subprime loans into SLABS, and the SLABS are unloaded onto investors by Goldman Sachs, Deutschebank, Citibank, and UBS.
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One set of giant banks originates the loans, another set buys them, and in between sits First Marblehead and NCSLT, whose sole purpose is to wrap them in a legal fiction that makes them eternal millstones around borrowers necks, immune to bankruptcy.
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This is why Smith's work is so important: when he shows that the law has been incorrectly interpreted - as he has in so many cases before now - the whole rotten system collapses and hundreds of thousands of Americans will get justice.
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And while NCSLT is the worst offender, it's not the only one. Smith's also locked in legal battles with Navient (formerly Sally Mae) and many other lenders.
Godspeed, Austin Smith, you slayer of debt!
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Godspeed, Austin Smith, you slayer of debt!
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